Jump in mortgage rates hurts US sales of new homes

WASHINGTON — Americans cut back sharply in July on their purchases of new homes, a sign that higher mortgage rates may slow the housing recovery.

U.S. sales of newly built homes dropped 13.4 percent to a seasonally adjusted annual rate of 394,000, the Commerce Department said Friday. That's the lowest in nine months. And sales fell from a rate of 455,000 in June, which was revised down from a previously reported 497,000.

The housing rebound that began last year has helped drive economic growth and create more construction jobs. But mortgage rates have climbed a full percentage point since May. The increase has begun to steal some momentum from the market.

Sales of new homes are still up 7 percent in the 12 months ending in July. Yet the annual pace remains well below the 700,000 that is consistent with a healthy market.

July's drop "may mark an uh-oh kind of moment for the housing recovery," said Mark Vitner, an economist at Wells Fargo Securities.

Homebuilder stocks declined sharply Friday, even as overall market indexes rose. Shares of Toll Brothers Inc., D.R. Horton Inc. and Lennar Corp. — three of the nation's largest builders — all fell more than 3 percent in afternoon trading.

And major homebuilders' shares have been dropping steadily since late May. The slide began after Federal Reserve Chairman Ben Bernanke first signaled that the Fed might reduce its bond purchases later this year. The bond purchases have helped keep mortgage rates and other borrowing costs low.

The average rate on a 30-year mortgage reached 4.58 percent this week, according to Freddie Mac. That's up from 3.35 percent in early May and the highest in two years.

The impact on would-be buyers' finances is significant.

Take someone who locked in the early May rate on a $200,000 mortgage. They would have a monthly payment of around $875. But the same mortgage at last week's average rate would cost $1,025 a month.

The difference adds up to $150 more each month — or $54,000 over the lifetime of a 30-year loan. The monthly figures don't include taxes, insurance or initial down payments.

Potential buyers appear to have noticed that financing a home purchase has become more expensive. The number of Americans applying for mortgages to buy homes has plummeted 16 percent since the end of April. And builders began work on the fewest single-family homes in eight months in July.

Still, mortgage rates remain low by historical standards. The same $200,000 loan would cost a buyer $1,330 a month at a 7 percent rate, the average since 1985.

Most economists expect the housing recovery will continue, albeit at a slower pace.

"We've been spoiled by low rates," Greg McBride, senior financial analyst at Bankrate.com. "People are gnashing their teeth now over a rate we had never seen four years ago." He notes that, based on their figures dating back to 1985, rates on the 30-year loan had never sunk below 5 percent until 2010.

The impact of higher mortgage rates has surfaced in the new-home market faster than the re-sale market because the new-home sales are measured when contracts are signed.

Higher rates may have also caused potential buyers to cancel some purchases of new homes. Vitner says that may explain why sales were revised down in May and June. Most of the revisions occurred in sales of homes not yet under construction. Buyers don't need mortgages until construction begins.

Sales of previously occupied homes reached a nearly four-year high last month. But that report measured completed sales, which typically reflects mortgage rates locked in a month or two earlier.

The jump likely reflected a rush by home buyers to lock in lower rates. Next week, a measure of contract signings in July will be released. Many economists expect that will drop.

Fed officials are closely watching the impact of higher mortgage rates on the housing recovery. The drop in sales could strengthen the hand of those Fed members who want to delay reducing the bond purchases.

Though new homes represent only a fraction of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to data from the homebuilders association.

"The spike in mortgage rates is slowing the pace of improvement," Dan Greenhaus, chief global strategist for BTIG, an institutional brokerage, said in an email. "Given the speed at which housing was improving, and the growing talk of a renewed bubble, some moderation, assuming it doesn't materially worsen, is not a terrible outcome."